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Letshego Holdings Limited Microlending BUY

Financial Results Overview P1.93 USD 0.25 June 25, 2012 Letshego Holdings Limited has released a good set of results for the year to January 31, 2012 despite the challenging operating Trading & Liquidity environment. The year under review was characterised by regulatory Mkt cap (Pm) 2,779 uncertainty pertaining to the Botswana operation which is the Group‟s lifeline. The Government of Botswana had previously Mkt cap (US$m) 357 announced its intention to cease facilitating the deduction of DCI Mkt weight 8.2%

Letshego‟s loan repayments from source with effect from December Shares in issue (m) 1.997

2011. Worthy of note as well, is the industrial action that was Free float 100% undertaken by employees of the Government of Botswana which Annual Liquidity 14.9% spun over two months. 12 month high 184

Despite these complexities, the Group was able to grow its loan book 12 month low 135 to P3.0bn, a 32.0% increase from the previous year. Invariably, interest income tracked the loan book growth, registering a 24.7% Codes increase to P900.5m. The Botswana operation continues to be the BSE LETSHEGO most significant market for the Group, contributing 59.9% to total net Reuters LET.BT advances. ‟s performance surpassed our expectations, Bloomberg LETSHEGO BG considering that it is still in start-up phase. It posted net advances of ISIN No BW 0322 P159.1m (FY11: P 0.79m). The quality of the loan book remains healthy with an impairment charge of P44.1m (FY11: P39.0m). This represents 1.5% of the book. Low impairments, guaranteed by the Results effective Central Registry loan repayment system are Letshego‟s key Date of last report February 8, 2011 competitive strength. P2.01 BUY

Last results Final – Apr 12 Expected results Interim - Oct 12

Analyst

Kgomotso Beleme [email protected]

Sales Kennedy Kgomanyane [email protected] Mooketsi Poane [email protected]

Buy

Source: Letshego Holdings Limited

The Mozambican start-up cost, coupled with the once-off legal and Cost-to-income ratio of 23.8% related costs associated with the establishment of Letshego‟s MTN (FY11: 19.1%) programme saw operating costs rise significantly to P235.6m from P157.5m. This translates into a cost-to-income ratio of 23.8% (FY11: 19.1%). Notwithstanding the incremental expenditure during the period, the company posted a pretax profit of P711.2m, up by 13.5% from last year.

Ground Floor, Letshego Place, Plot 22, Private Bag 00113, Tel: +267 3957 900 Fax: +267 3957 901 www.stockbrokers-botswana.com

Letshego Holdings Limited 25 June 2012

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During the year, the company issued a scrip dividend amounting to Profit after tax up by 22.1% P274m to shareholders on a basis of 7 new shares for every 100 shares held. This was done in order to optimally make use of the additional company tax reserves. The effect was a positive contribution to the bottom line due to the resultant credit to the company‟s tax charge. Post tax profit rose by 22.1% to P577.8m.

Sources: Letshego Holdings Limited

Letshego is well capitalized with shareholders‟ equity of P2.2bn. As at Debt to total asset ratio of 0.25 January 31, 2012, the Group‟s leverage ratio as measured by total assets to equity, was at 1.4 times compared with a weighted average for the Botswana banking sector of 9.1 times. Borrowings stood at P802.9m, producing a debt to total assets ratio of 0.25 (FY11: 0.21). Letshego funds itself through medium term loans from banks and other financial institutions. To safeguard against access to funding hampering the company‟s growth, management is exploring alternatives including the bond market as well as converting the company into a commercial bank that could take deposits.

Capital Raising Initiatives

Plans to transform Letshego‟s business model from just lending Letshego to start taking deposits operations to being a fully fledged commercial bank are underway. An application for a banking license was submitted to the Central Bank of in December 2011. We expect that the company will do the same in its other markets. As already alluded to, this will aid in enhancing the company‟s capital for its future expansion plans.

Another initiative that we believe places Letshego in a good position in so MTN program listed on the JSE far as funding is concerned has been the successful listing of a Medium Term Notes (MTN) program on the Johannesburg Stock Exchange in July 2011.

A vital plus, is that Letshego is globally rated. Moody‟s Investors Services Rated Ba3 – negative by Moody’s had previously assigned the company a credit rating of Ba3, with a „stable‟ outlook. This was however tarnished to „negative‟ following the announcement by the Government of Botswana of their intention to cease aiding in source collections. Given that the Government has since gone back on their decision, we expect an improved rating in the future.

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African Expansion Plan – Acquisitions

In line with its Pan African expansion plans, Letshego Group is in the Letshego to acquire a 62.52% process of acquiring a 62.52% stake in the issued share capital of Micro interest in MAL Africa Limited (MAL), for a consideration of $3.3 million. This is being funded from existing resources. MAL is a private company incorporated in with subsidiaries in , , and an associated company in .

MAL‟s loan book stood at $7.2m, with net assets amounting to $3.9m as at December 31, 2011. MAL has a similar business model as that of Letshego, so integrating it will not pose a problem.

We expect the acquisition, once complete, to drive growth both in the Acquisition to enhance existing short and long term. The acquisition will elevate Letshego‟s existing product offering product offer to a new dimension because MAL will bring on board, innovative products including mobile banking technology and over the counter cash handling for loan transactions.

The group continues to evaluate new expansion opportunities into other African markets, either through further acquisitions or green fields.

Regulation

We reiterate that Letshego‟s biggest weakness with regards to its Collection methodology threatened business model has been its collection methodology. This became apparent last year when the Government of Botswana announced that it would cease facilitating the deduction of loan repayments from source with effect from December 2011. The announcement created a lot of uncertainty and panic amongst investors, resulting in the share price of the company plummeting by 25% between September 1, 2011 and March 1, 2012.

Source: Stockbrokers Botswana

Without the payroll deduction model, Letshego faces the risk of loan Alternative collection measures put collection and hence asset quality deterioration. Although the Group is still in place using the deduction at source, measures have been put in place for alternative deduction methodologies. Direct debit mandates with various banks have already been signed by all clients. As it stands, the Government of Botswana is awaiting the outcome of the ongoing court case between itself and the unions.

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The Non-Bank Financial Institution Regulatory Authority (NBFIRA), a NBFIRA to ensure compliance regulatory body in Botswana, is now in full swing. This is a welcome development on Letshego‟s part as it will aid in levelling the playing field with regards to the Central Registry. This will ensure that all players adhere to the stipulated minimum take home amount for clients.

NBFIRA generates income through the levies they charge the companies NBFIRA charges micro lenders they are regulating. An annual fee of 0.5% of Letshego Botswana‟s loan an annual fee of 0.5% of loan book has been effected starting February 17, 2012. book

Outlook

Botswana operation reaching We are of the view that the Botswana market, which has been the maturity Group‟s significant market over the years, is now reaching maturity and

we expect growth to slow down going forward. This will be worsened by intensifying competition, with new entrants such as Bayport Financial Services.

We however, still hold the optimistic view on the long term benefits of the Growth to come from African African expansion from our last report. Management has indicated expansion acceleration in extending the Group‟s footprint as well as utilizing the existing staff compliment, branch network and technology platform to drive efficiencies and new opportunities.

Key Performance Indicators 2012

Return On Average Equity (RoAE) 28.7% Return on Average Assets (RoAA) 20.5% Cost/Income Ratio 23.8% Dividend Yield 1.6% PE Ratio 4.8x

Valuation and Recommendation

Given that Letshego does not have any concrete listed peers on the Low PER domestic bourse, we have conducted a relative valuation to the domestic listed commercial banks. At the current price of P1.40, the counter is trading on a historic PER of 4.8 times versus the banking sector weighted average of 10.5 times.

Peer Stock PER(H) ABCH 8.5 Barclays 11.6 FNBB 12.2 Stanchart 8.5 Letshego 4.8 Weighted average 10.5 Premium (Discount) to weighted average (54%)

For the DDM model, we have increased our discount rate to 17.5%, Fair value of P1.93 reflective of the looming regulatory uncertainty. We derive a DDM valuation of P1.93. This presents an upside potential of 37.9% to the current trading price of P1.40. BUY

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This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Stockbrokers Botswana Limited (“SBB”) from sources it believes to be reliable, but no representation or warranty is made or guarantee given by SBB or any other person as to its accuracy or com pleteness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of SBB as of the date of this report only and are subject to change without notice. Neither SBB, nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. SBB and its respective affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this report may, from time to time, (1) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (2) have a consulting, investment banking or broking relationship with a company referred to in this report; and (3) to the extent permitted under applicable law, have acted upon or used information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time.

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